US credit rating downgrade sparks market mayhem: Shock decision by US agency Fitch sends global stocks tumbling

Global markets suffered a mass sell-off after the US government’s credit rating was downgraded following a debt ceiling crisis earlier this year.

Credit rating agency Fitch, one of the industry’s ‘Big Three’ alongside Moody’s and Standard & Poor’s, lowered its rating on the US to AA+ from AAA, saying the tussle over the country’s borrowing limit in May could threaten its ability to pay its bills.

The firm also predicted the country’s fiscal situation would deteriorate over the next three years as increased polarisation between the Democrat and Republican parties was likely to lead to further stand-offs in the future.

It was the second agency to strip the US of its top rating after S&P did the same in 2011 when it narrowly avoided a default during a similar debt ceiling crisis. 

Fitch’s decision drew backlash from US officials, with Treasury Secretary Janet Yellen saying the move was ‘arbitrary and based on outdated data’.

Her views were echoed by the White House, which said it ‘strongly disagrees with this decision’. 

Press secretary Karine Jean-Pierre added it ‘defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world’.

The Biden administration cited pundits who had dubbed the move ‘absurd’, ‘off-base’ and ‘correctly ridiculed’. 

Fitch’s downgrade threatens to further inflame concerns about the US as it heads into a volatile 2024 presidential election season that could see the return of Donald Trump to office.

The former president is set to face yet more legal troubles after he was charged by federal authorities with plotting to overturn the results of the 2020 election.

The move surprised markets and sparked a rout, with the FTSE 100 tumbling as much as 1.9 per cent during the session before eventually closing down 1.36 per cent, or 104.64 points, to 7561.63 while the FTSE 250 dropped 1.33 per cent, or 252.78 points, to 18812.88.

In Europe, the German Dax was off 1.36 per cent while France’s Cac 40 dipped 1.26 per cent.

It followed a similar slump in Asia where the Hong Kong Hang Seng Index fell 2.47 per cent and Japan’s Nikkei 225 tumbled 2.30 per cent.

On Wall Street, the Dow Jones Industrial Average lost 0.98 per cent while the S&P 500 slipped 1.38 per cent and the Nasdaq dropped 2.17 per cent.

Interest rates on US debt also surged on bond markets, with yields on the US 10-year Treasury rising as much as ten basis points to top 4.12 per cent yesterday, its highest level since November 2022. 

The dollar, meanwhile, rose 0.46 per cent against the pound.

Laith Khalaf, head of investment analysis at AJ Bell, said: ‘When the debt of the world’s largest economy is seen as lower quality, it will naturally trouble investors and make them rethink their portfolios.

‘It also might surprise some people given how the US economy is proving to be more resilient than expected.’

Capital Economics said the timing was ‘a little strange’ given they expected the US was ‘poised to pull off the seemingly impossible trick of bringing inflation back to target without triggering a recession’.